Tackling inequality to achieve inclusive growth

Insights and conclusions from The Broker’s debate on inequality

Inequality rates continue to soar all over the world despite falling poverty rates and global GDP growth. The world’s richest 1% own 40% of global wealth, while the bottom half own only 1%. To improve our understanding of inequality and to identify ways to tackle it, The Broker launched an international online debate. This debate learns that we need a better understanding of what we measure, plus new policies that can spur an inclusive economy.

In December 2012 The Broker published its ‘Dossier on Inequality’ and launched an international online debate. The contributions, from a wide variety of practitioners and scholars, fell roughly into two camps: those which stressed the need to restructure the global economy, addressing inequality as a systemic problem, and others that focused on how to reduce specific kinds of inequality. Of course, these approaches are interconnected. Two main questions have been at the heart of the inequality debate from the very beginning: whether inequality should be an explicit goal of the post-2015 agenda, and how can we best tackle inequality to achieve a more inclusive economy and society.

Poverty and inequality

An important distinction that has emerged in the post-2015 discussion and was also prominent in The Broker debate is the difference between poverty and inequality.

Martin Ravallion of Georgetown University took an interesting position on this issue. While fully acknowledging the problem of inequality, he nevertheless argued that eradicating poverty should be the prime development goal. This was echoed by former Dutch ambassador Wieck Wildeboer, who called for ‘continuity, consistency, and dedication’ in relation to existing development models. According to Ravallion, the problem is not so much that inequality is not addressed prominently enough on the development agenda, but that the social effects of poverty are not properly taken into account in current poverty standards. As a consequence, the inequalities that arise from poverty are neglected. Rather than making inequality an explicit development goal, Ravallion suggests that we use a different poverty standard: ’A measure of relative poverty that reflects these social effects on welfare will almost certainly put a higher weight on inequality than a standard absolute poverty measure.’

Inequality dossier & debate

At the end of last year, The Broker launched its ‘Inequality Dossier’, and simultaneously started an interactive debate. This debate took place in the general context of the ongoing focus on the post-2015 agenda on The Broker website. The debate generated 42 blog posts and 24 comments. Many scholars and practitioners from various fields shared their reflections on the issue of inequality, starting from the core questions: should inequality be one of the central themes, or perhaps the central theme, of the post-2015 global development agenda? And, if so, in what way? Additionally, a special ‘Broker Day’ was dedicated to the question of how to restructure and regulate our global financial system and give shape to the global goal of inclusive growth. The speeches by The Broker’s Editor in Chief, Frans Bieckmann, Minister of Foreign Trade and Development Cooperation Lilianne Ploumen, and Professor of Financial Geography Ewald Engelen can all be viewed on The Broker’s website.

Lilianne Ploumen made a case for an international financial transactions tax. Ewald Engelen identified the international banking system as the main cause of the financial crisis, and pressed for the banks to be restructured. Frans Bieckmann stressed the importance of international transparency rules to curtail the traffic of unrestrained capital flows.

Ravallion’s argument followed that of Stephan Klasen of the University of Göttingen, who stressed that reducing inequality is already implied in the MDGs, for example in the aims of achieving greater equality of income, education and health. Additionally, Klasen pointed out that it was a great success for the global community to reach agreement on a set of indicators for the MDGs. In this respect, former ICCO Programme Coordinator for Cambodia Roger Henke emphasized the importance of having the broadest possible political support for the post-2015 agenda. In the process of defining new development goals, policymakers must also take account of how feasible they are. Since there is controversy about what level of inequality is optimal – assuming that a certain level of inequality will stimulate economic growth – the development agenda might be hindered rather than benefited if it slips into quarrels about definitions.

By contrast, Arjan de Haan of the International Development Research Centre argued that the problem with the MDGs was precisely that they fitted so well into the international power playing field. As he put it, ‘[t]he 2015 MDG agenda has been successful, in its own terms, mainly because it provided the aid industry with a clear sense of direction around aid allocations and effectiveness, based on a simple North-South dichotomy’. De Haan argued that, to address inequality, social movements rather than the ‘aid industry’ should drive the formation of the post-2015 agenda.

Oxfam’s Ricardo Fuentes-Nieva also challenged the arguments of Ravallion and Klasen. While he agreed that it is difficult to determine the right level of inequality and how much inequality reduction is desirable, he also stressed that this should not be a reason to drop the discussion. Fuentes-Nieva suggested that the Palma Index (a ratio of income shares of the poor and the rich populations in a country, designed by Alex Cobham and Andy Sumner) might offer a solution here, since it gives a clue about how ‘bad’ the inequality is in a given country. (See here a summary of the debate on inequality indicators.)

Different challenges in low- and middle-income countries

Martin Ravallion emphasized that 70% of the world’s poor live in middle-income countries (MICs). The differences between poverty and inequality play an important role in development goals for low-income countries (LICs) and MICs. Some participants in the debate argued that this distinction should be maintained. Development goals in LICs should then be framed in terms of poverty reduction, whereas in MICs where the social institutions are more solidly embedded, development goals should focus more on reducing inequality.

René Grotenhuis, formerly of Cordaid, urged that poverty reduction and aid in LICs should continue as before, while in MICs it should be approached from the perspective of inequality. Grotenhuis argued that this better responds to the concerns of MICs, which are generally not very fond of traditional aid programmes and foreign intervention in their domestic issues. As their living standards improve, they are demanding greater national sovereignty. However, according to Thijs Berman of the Dutch Labour Party, international policy-makers should take account of the fact that the majority of the world’s poor live in MICs. The international community should continue to provide aid in MICs where needed, while simultaneously aiming to strengthen civil society in these countries.

Maarten Brouwer, Dutch ambassador to Mali, argued that the one-sided focus on poverty reduction in the MDGs undermines the meaning of development in general because it centres on technical, quantifiable primary goals. Brouwer called for reassessment of the transformative power of development, reflected in a more integrated and context-specific approach (for example, better productivity by improving the channels of skilled development and strengthened institutions; see the box on intermediary variables).

Intermediary variables

Inequality may be the direct cause of a lack of wellbeing, but more often it has an impact on society through intermediate variables, which are generally socio-cultural or socioeconomic in nature.

An example of a socio-cultural variable is India’s caste system, which contributes to low literacy, poverty and low life expectancy for the members of the lowest class and the casteless. Inequality may also lead to social unrest and even revolution through intermediate variables like higher expectations and a sense of dignity. As noted in the book ‘The Spirit Level’, stress and status fear are intermediate variables that can be considered responsible for certain social consequences of inequality, such as obesity. Here, inequality is the independent variable, caused by something else. In their contribution, Nicole Metz and Tom van der Lee of Oxfam Novib analyzed how inequality affects social wellbeing, while Joop de Jong of the VU University and Syed Mansoob Murshed of the Institute of Social Studies identified inequality as one of the main drivers of violence and conflict. Paul Dornan of Young Lives further demonstrated how inequalities in learning and nutrition during childhood have lifelong effects.

Policies to reduce inequality in the long term do not necessarily directly focus on income inequality, but on factors like education and skills that help to increase income and therefore reduce poverty. With better skills and a higher education, people may get a job more easily and earn more money. In other words, inequality can be reduced by improving the intermediate variables of education and skills, which lead to a higher income and less poverty. In the socioeconomic sphere, improving poor access to farmland may have the same effect. Here, inequality is the dependent variable, and caused by something else. Lawrence Bategeka of the Economic Policy Research Centre explained, for example, how the dismal growth of the agricultural sector in comparison to the services sector has led to greater income inequalities in Uganda.

Different kinds of inequality

Based on the debate on The Broker website, three kinds of inequality can be distinguished: economic, political and social. Economic inequality mainly refers to income inequality. Additionally, it addresses how income and tax burdens are distributed between capital and labour, and to what extent the financial system causes global inequalities. Political inequality means that some people have more say in political decision making than others. It is about the lack of democratic voice, political representation in organizations and institutions, and the right to vote. Social inequality is linked to wellbeing and, in legal terms, human rights. It refers to a myriad of inequalities, including unequal access to water and sanitation, nutrition, health, employment, housing, education, social security and free time.

1) Economic inequality

The most current definition of economic inequality is inequality of income, which is mainly caused by the unequal distribution of wages and assets. Andrew Berg and Jonathan Ostry of the International Monetary Fund identified income inequality as the key factor that determines the duration of ‘growth spells’ (periods of long growth). They concluded by saying, ‘We find that high growth spells were much more likely to end in countries with less equal income distributions. The effect is large. For example, we estimate that closing, say, half of the inequality gap between Latin America and emerging Asia would more than double the expected duration of a growth spell.’ They added that inequality has a large effect on the duration of long-term growth regardless of the other variables used in the model to analyze the causes.

Whether reducing income inequalities is a responsibility of national governments or the international community remains a matter of debate. Charles Gore of the University of Glasgow, for example, opted for a global approach, referring to income inequality between countries. But he also emphasized that reducing national income inequalities should be a matter of concern for national states, rather than the global community, since national inequality is not a global public good.

Dealing with national income inequality is increasingly a concern for the developed world. As the Conference Board of Canada pointed out, income inequality in Canada has increased over the past 20 years. The causes of rising inequality tend to fall into two broad categories: market forces, in particular skill-biased technical change and increased globalization, and institutional forces, such as declines in unionization rates, stagnating minimum wage rates, deregulation, and national policies that favour the wealthy. Meanwhile, the effects of tax and transfer systems that used to reduce inequality have become weaker than in the past. Pointing to the fact that income distribution in Europe was more unequal than in the average OECD country, Roel van Engelen of the University of Amsterdam argued that austerity, cutbacks and balanced budgets have been dominating EU policies since the start of the economic crisis. However, to tackle rising income inequality, the EU should aim for a more equal distribution of income, boosting consumer confidence and increasing demand for goods and services instead.

The Broker’s online debate and The Broker Day both addressed the current financial system as one of the main drivers sustaining economic inequality on a global scale. The system facilitates massive capital flight through shadow banks and tax havens dispersed across the world. The Global Taskforce on Financial Integrity and Economic Development estimates that illegal capital flight from developing countries, also known as ‘illicit financial flows’, amounted to about US$8 trillion in the 1999-2009 period and $859 billion in 2012. Illicit flows hinder national governments in developing countries from collecting tax, with the money mostly disappearing in tax havens and banks in the West. Free trade and free capital flow is promoted on a global scale, whereas investment in the real economy, especially to the benefit of the poor, is neglected. As such, the financial system contributes to the growing gap between the rich and poor and undercuts the beneficial effects of inclusive growth on the population.

Therefore, if economic inequality is to be tackled on a global scale, it is crucial to address the challenge posed by international capital flows and international tax justice. Francine Mestrum of the Université Libre de Bruxelles has called repeatedly for a just global taxation system. Mestrum argued that tax policies must be reformed to achieve more equal redistribution globally, as did Claudio Schuftan of the People’s Health Movement, who proposed a more progressive tax-based system. These policies could be seen as part of the process of shifting the macroeconomic focus to the ‘real’ economy rather than allowing the financial sector to flourish boundlessly.

However, the potential effect of redistributive policies, like global tax reform, does not take into account the fact that much of the world’s population operates in the informal economy and thus outside of the tax system. As Ted Schrecker of the Bruyère Research Institute saw it, ‘[i]t is very hard to tax or offer cash transfers through the tax system in an economy where the majority of people is functioning outside the waged sector’.

Oxfam’s Nick Galasso showed how the financial sector in the US has influenced government policy to allow an exponential growth of risk and risk behaviour in the economy. As a consequence, those with top incomes gained even more wealth, while those on low and middle incomes bore the risks. After the economic crash, it was the latter who suffered the most due to the burst of the housing bubble, with millions of households left underwater with debt and unemployment rates soaring.

Another way of understanding the impact of financialization on societies is by taking into account its effects on the distribution of income between labour and capital, as Rolph van der Hoeven of the Institute of Social Studies demonstrated. Van der Hoeven suggested monitoring how particular development goals (such as improving access to social services and increasing national income) affect specific socioeconomic groups. This would enable the ‘average figures’ of nation states – that are not captured by the MDGs, which focus on global targets – to be exposed in more detail. Van der Hoeven argued that it would be possible to increase the global wage share by improving financial regulation, strengthening the bargaining power and inclusion of low-income groups, and reinforcing the welfare state, without hindering economic efficiency or growth.

Under current circumstances, the pursuit of wealth accumulation and the free flow of capital put labour conditions under pressure on a global scale and have disproportionate effects on low-income groups. According to Andrew McKillop of EnergyPulse, this is because the free trade conditions in our global economy aim to maximize production to the benefit of capital. This, said McKillop, ‘spurs outplacement and delocalization, reduces wages, and raises unemployment in the formerly rich nations, even if the process enriches poorer nations’.

The difference between poverty and inequality

Traditionally, aid has mainly been targeted at eradicating extreme poverty and fighting human deprivation. It includes well-defined development targets, and often implies the transfer of a specific good (like money, medicines or education programmes) from one country to another. Poverty is easier to quantify than inequality. MDG1, for example, aims to halve the amount of people living below the absolute poverty line of $1.25 a day.

While poverty is defined according to hard minimum lines, inequality is always relative. Although there are instruments to measure inequality, like the Gini coefficient, it is much harder to try and achieve concrete inequality rates. Inequality describes a certain relation of income or wealth between people. Dealing with inequality, therefore, can be framed as a broader development challenge. It implies addressing the question of how to change power relations. Those who are excluded from economic, social and political institutions do not have a share in deciding how these bodies are organized, and how capital is distributed. Global development policymakers thus face the challenge of dealing with structural causes that sustain all sorts of inequalities.

2) Political inequality

Inequality is not only an economic, but also a political problem. The inequality debate demonstrated that economics and politics cannot be separated. As consultant and economist David Woodward argued, the dominance of inequality of power institutionalized in the ‘economically-weighted’ voting system in the IMF and the World Bank, for example, allows for the supremacy of orthodox economic solutions and neoliberal politics. In a similar vein, Jasper van Teeffelen of the Evert Vermeer Foundation showed how the current EU biofuels policy fails to take the interests of developing countries into account. Moreover, the bargaining power of some of the European Commission’s Directorate Generals, such as Trade and Agriculture, simply overpower the Development and Cooperation DG. Unless these international institutions are willing to transform their protectionist institutional walls to make them more democratic, participatory and equalizing, allowing all countries a fair share in decision-making, there is little chance that the trend of rising global inequality will be reversed.

Meanwhile, many advanced economies are practicing protectionism that benefits the wealthy. As Oxfam Novib’s Nicole Metz and Tom van der Lee argued, ‘some key global powers use other countries’ sovereignty as a reason to not discuss in-country inequalities openly and are anxious not to disturb their relations with the top 1% within their own societies. The European Union and member states like the Netherlands are aware of inequalities but shy away from bold steps’. In other words, to tackle inequality on a global scale, the global power relations that sustain huge income gaps while adhering to the orthodox ‘trickle-down’ framework must be broken down.

Another concept that could use some politicization is scarcity. Ted Schrecker argued that the inequality of ‘the power to decide on the uses to which resources are, or are not, put’, such as alleviating poverty or improving access to education and healthcare, are tied to a limited budget. During The Broker Day, Rolph van der Hoeven said that being able to exercise power over the economic processes in which one participates has to be linked with what he calls the primary development goals of the post-2015 agenda, i.e. facilitating decent employment conditions on a global scale. Schrecker praised the WHO’s Commission on Social Determinants of Health report which adopted tackling the inequitable distribution of power, money, and resources as one of its three overarching recommendations.

The role of the financial sector in sustaining political global inequalities cannot be emphasized enough. David Sogge of the Transnational Institute argued that the ’upstream sources’ of inequality, to which the financial sector belongs, should be charted, as should organizations that collaborate with the sector. Sogge was rather sceptical about the MDGs, arguing that the corresponding development framework does not enable equitable development in poor countries, sustaining the ‘poor-to-rich’ illicit financial flows. Instead, Sogge advocated the political participation of heterodox researchers and policy activists in large financial institutions like the World Bank, IMF and OECD, and emphasized the need for a strong civil society that enables politics to rebuild itself again and take the necessary steps to put an end to upward mobility of capital.

Harry Boyte of the Center for Democracy and Citizenship responded to the appeal for a more bottom-up approach to the development of societies. He suggested that local civil society organizations, like small businesses, sports clubs and neighbourhood groups, should be actively involved in the politics of everyday life, participating as agents in democratic processes. In this way, citizens can become the co-creators of their society in a work-centred democracy.

3) Social inequality

As the debate showed, social inequality is a very broad term that can embraces a wide variety of inequalities including unequal access to water and sanitation, nutrition, health, employment, housing, education, social security and free time. Most of the MDGs are targeted at improving these basic social needs, as a lack of them is often a sign of poverty and human deprivation.

In the inequality debate, Hilde Kroes of Rutgers WPF underlined how important the dispersal of sexual and reproductive health information, education and services is for ‘turning the tide’ of inequalities in society. She addressed three barriers that contribute to sustained inequality: social barriers, e.g. social norms, stigma and discrimination which hinder people from exercising their sexual and reproductive rights; legal barriers, including the criminalization of abortion, travel restrictions on people living with HIV, and impunity for perpetrators of sexual and gender-based violence; and cultural barriers, like forced marriage, female genital mutilation and honour crimes.

In a similar way, Tanja van de Linde of Plan Netherlands urged for better social protection and gender justice by extending social security to gender equity, empowerment, economic, and social and cultural rights. These goals might be achieved by choosing a ‘systems approach’ aimed at strengthening institutions, and a ‘multi-sector approach’, which takes account of the linkages between social protection and outcomes in gender, child protection, education and health.

These two contributions both stressed the fact that particular social groups suffer disproportionately from specific kinds of inequalities in society. Generally, they are the most vulnerable classes in society, such as the poor, and women and children. These groups often miss out on the benefits of economic growth, because they are excluded from the socioeconomic transformations that societies go through in the process of development. Adam Wagstaff of the World Bank argued that the poor do not automatically ‘catch up’ in the process of progress or of reducing inequality reflected in a country’s overall picture. He demonstrates that there are big differences in education and health outcomes between, for example, the poorest 40% and the rest of the population in developing countries. These numbers imply consequences for policymaking: ‘If inequalities in education and health outcomes across the income distribution matter, and if we want to see prosperity in its broadest sense shared, it looks like we really do need an explicit goal that captures inequality’.

Ilcheong Yi of UNRISD took a slightly different perspective. While arguing that social policies are indeed central to tackling the root causes of poverty and inequality, he noted that the most significant reductions in poverty and inequality occurred in countries that aim to establish universally accessible, affordable and available social services and transfers. These policy strategies were not specifically targeted at the poor, but aimed at ‘development for all, which consequently resulted in the reduction of poverty and inequality’. In this sense, tackling social inequalities can be seen as part of deeper development processes which transform societies at the roots into more inclusive and sustainable systems.

Towards an inclusive economy and society

In The Broker’s debate on inequality, a wide variety of experts presented many different perspectives on the economic, political and social aspects of inequality. But what is the best way to tackle inequality and achieve an inclusive economy and society? The Broker believes that building a more inclusive economy, must take into account deep reforms at all levels– economic, social and political. That will require a comprehensive approach which encompasses many of the insights highlighted in the debate.

Creating an inclusive economy requires more sustainable and participatory societies whose members are all involved in the growth process and are not politically and socially excluded. Inclusive growth models can also help prevent global economic crises through better regulation of capital flows and a reform of the financial system, and protect the environment, by aiming for sustainability and ‘greening’ the economy on a global scale.

A new economic framework requires that we rethink the meaning of welfare and wellbeing. This implies, for example, redefining growth beyond GDP. Sjoerd Nienhuys of Huys Advies argued that GDP and GNI are outdated and advocated measuring wellbeing using the Human Development Index and indicators of welfare and happiness. Similarly, David Woodward claimed that giving everyone an extra dollar to spend would not increase wellbeing to the same extent at all levels of income; it would mean a lot more to a landless labourer than a billionaire. Yet classical economics does not take this difference into account. Another option, proposed by Francisco Ferreira of the World Bank, could be an Index of Economic Opportunity, which could provide us with much more information about ‘the real pockets of deprivation and exclusion in society’.

Inclusive growth and sustainable development can be seen as two sides of the same coin. In his first contribution, David Woodward showed how they are linked. He urged that global policies should aim to meet the needs of the poorest, who suffer disproportionally from the negative effects of globalization, such as climate change (see also ’Left Behind by the G20?’, Oxfam 2012). Heleen de Coninck of the Radboud University Nijmegen, however, warned that making inequality policies conditional on green or sustainable growth is still a bridge too far. She argued that climate mitigation policies should target the rising global middle classes and industrializing parts of the countries they live in and spare the poor, even if that implies that they continue to use fossil fuels

Jur Schuurman of Agriterra proposed another way of fighting inequality and achieving a more inclusive economy: through strong membership organizations for those involved in production processes, such as farmers, labourers and retailers. These organizations, Schuurman argued, ’by their very nature, give voice and (market) power to their members, [who] would not have much leverage as individuals’. Because these organizations are controlled democratically by their members, market powers ‘cannot just act as they please’. Lawrence Bategeka, reflecting on development successes and failures in Uganda, advocated a more socialized economy: ‘[P]eople must be viewed as agents of economic growth and transformation and not passive recipients of social services and/or handouts from either development vital for tackling inequality, and are part of the path towards inclusive partners or their own government’.

The Broker debate highlighted the challenge of transforming the global economy into a more inclusive one. There was a general consensus that this will require an interdisciplinary approach and a critical assessment of our current development goals. It also means that we have to reconsider the relation between aid and development. In the words of Maarten Brouwer, the international community should strive for ’a development approach that dares to challenge and confront by understanding and promoting deeper processes of change that will address inequalities. […] The implicit necessity to debate shared values, political solutions and the required partnerships will help development cooperation retake its former position at the centre of international policies’.